Posts tagged Grading the States

Here we go again. Whenever Iowa legislators or lobbyists want to cut taxes for business, or for high-income individuals, they trot out the same myth about competitiveness.

The reality is pretty simple: Iowa is a low-tax state for business, and has been for some time. Late last year, the Council on State Taxation released its latest report on how much businesses pay in state and local taxes, prepared by the accounting firm Ernst and Young. Iowa was 18th lowest — only 17 states had a lower overall tax rate on business, 32 had higher taxes.[1] Another accounting firm, Anderson Economic Group, ranks Iowa’s business taxes even lower, at 14th – only 13 states have lower taxes.[2]

But why use real data when you can just cite some anti-tax, anti-government think tank that has cobbled together a “competitiveness index” that makes Iowa look bad?

So it is again in 2020. The governor cited the need to be competitive in her condition of the state address, and the Senate president repeated the theme. To support the claim, Senator Charles Schneider pointed to a bogus study by the Tax Foundation that ranked Iowa 42nd among the states in “business tax climate.” Only eight states were worse.

The Tax Foundation, it turns out, mashes together 124 components of state tax systems to produce an overall “index number” to rank the states. Their index is meaningless; it gives weight to components that cannot plausibly affect tax competitiveness, while ignoring features that have a large impact on business taxes.[3]

The last problem is particularly salient for Iowa. Iowa offers single-factor apportionment, which can drastically reduce a corporation’s Iowa tax if they export much of their production. And Iowa is one of the few states that allow corporations to deduct part of their federal income taxes on their state return. Both of these factors are completely ignored by the Tax Foundation. Instead, they focus on things like the number of tax brackets. Meanwhile, the sales taxation of food is a good thing, in their book; Iowa’s failure to tax food somehow makes us less competitive. This is nonsense.

Iowa is a slow growing state, but more tax cuts for those at the top will not help. They will further erode the state’s ability to invest in our roads and bridges, in our children and our workforce, the building blocks of a strong economy. Education, from early childhood through college, not only produces the skilled workforce businesses need, but makes it easier to attract workers from elsewhere, knowing their children will get a good education.

Peter Fisher is research director of the nonpartisan Iowa Policy Project in Iowa City, and professor emeritus in the School of Urban and Regional Planning at the University of Iowa. His widely cited Grading the Statesanalysis is available at gradingstates.org.

The Tax Foundation is at it again. The corporate-funded think tank released their latest bogus measure of state tax competitiveness, the 2019 State Business Tax Climate Index (SBTCI), on October 22. The major features of the SBTCI remain unchanged from earlier editions. The fundamental criticisms of their methodology remain as salient as ever.
The State Business Tax Climate Index purports to measure a state’s “tax competitiveness” but the index bears very little relationship to what businesses actually pay in taxes in one state vs. another. Of the 10 supposedly “worst” states in terms of business taxation according to the latest Tax Foundation ranking, six (including Iowa) actually ranked among the 21 states with the lowest business taxes, including two among the lowest 10, according to of the Council on State Taxation.
The Tax Foundation ranking (they put Iowa as the ninth-worst state) differs dramatically from more defensible analyses that simply measure the average effective corporate income tax rate. The Council on State Taxation produces periodic estimates of all business taxes as a share of private sector Gross State Product and has consistently found Iowa to be among a sizable group of states right in the middle. In fact, their latest report shows that only 17 states have a lower effective business tax rate than Iowa, while 30 states have a higher rate.
The SBTCI is a combination of 124 components of state tax systems, giving substantial emphasis to some components that cannot plausibly affect tax competitiveness, while ignoring features that have a large impact on business taxes (single-factor apportionment and deduction of federal corporate income taxes). The last problem is particularly salient for Iowa. Iowa offers single-factor apportionment, which can drastically reduce a corporation’s Iowa tax if they export much of their production. And Iowa is one of the few states that allow corporations to deduct part of their federal income taxes on their state return. These two features help explain why the Tax Foundation ranks us poorly while others show us with average, or lower than average, taxes on business.
There are a few changes in the 2020 version of the index. The Tax Foundation now penalizes states for attempting to rein in corporate tax avoidance in two ways. First, they penalize a state’s score if they conform to the Global Intangible Low Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, which are intended to reduce the incentive to shift corporate assets abroad. State conformity would in fact help states avoid some of the corporate tax avoidance that has been eroding state revenues, due to the ability of corporations to shift profits overseas. But restoring revenues in this way is a bad thing, according to the TF. The second new feature is a penalty for states that conform to the net interest limitation in TCJA. This provision limits the ability of corporations to deduct interest expense, but apparently the TF thinks the deduction should be unlimited.
Iowa has chosen to conform to both of those provisions, for which the state’s taxpayers should be thankful. That the Tax Foundation has penalized Iowa in the rankings for trying to close corporate loopholes is just another reason to ignore their rankings.
Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

Basic flaws remain in Tax Foundation business index

The Tax Foundation released the 14th edition of its State Business Tax Climate Index (SBTCI) today (Sept. 28). The basic flaws that have rendered it of little use as a guide to state economic policy remain. While a few methodological tweaks have been made, it is still a hodge-podge of over 100 different features of state tax law, mashed together into an index number. The components are weighted illogically, and the result is a ranking that bears little or no relation to the taxes businesses actually pay in one state versus another.

The Tax Foundation acknowledges that they are not measuring actual tax levels on business, but rather the states’ tax structure. But they provide no evidence that tax structure influences business decisions. If you were a business, what would you care more about: the bottom line amount you will pay, or whether there were three tax brackets or five tax brackets involved in the calculation that got you there? The Tax Foundation would have you count brackets, and ignore the dollars.

The SBTCI has separate components for the corporate income tax, the individual income tax, property taxes, etc. So let’s consider the corporate tax component. Even as a measure of “structure” somehow, it falls short because it leaves out two major determinants of corporate income tax liabilities — federal deductibility and the apportionment rule — while including numerous minor features. As a result, the corporate tax index is a meaningless number.

Furthermore, the corporate income tax is much less important than the property tax, for most businesses. According to the Council on State Taxation, the property tax accounted for 43 percent of all business taxes, the corporate income tax just 11 percent, in 2014. Yet in coming up with the overall state rankings, the latest Tax Foundation index weights the property tax 14.9 percent, the corporate income tax 19.7 percent. That makes states with high property taxes and low corporate income taxes look much better on the index than they really are, and penalizes the states with a robust corporate income tax, a high state share of education funding, and low property taxes.

To make matters worse, the index weights change every year. This makes it impossible to know if a change in a state’s rank from one year to the next is due to a change in tax law, or just a change in the weights.

Editor’s Note: Peter Fisher, research director of the nonpartisan Iowa Policy Project (IPP), wrote this blog for GradingStates.org, IPP’s separate website devoted to promoting a better understanding of various state business climate rankings. For a look at components of state policies that can promote prosperity, see this page on the GradingStates.org site.

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